Lindab International AB (publ) (LIAB) Earnings Call Transcript & Summary

Hello. And welcome to the Lindab Q1 2020 report. [Operator Instructions] Today, I'm pleased to present Ola Ringdahl, CEO; and Malin Samuelsson, CFO. Please go ahead with your meeting.

Hi, everyone. And welcome to this call. My name is Ola Ringdahl, and I'm the President and CEO of Lindab. I'm sitting here together with our CFO, Malin Samuelsson. We go to the agenda slide. In today's presentation, we have the usual agenda. At the end, we will open up for questions. We'll start with the overview on Slide 4. So key highlights, Q1. We had a positive development for the group until mid-March, and then we started to see the negative effect of COVID-19 in certain countries. Net sales for the first quarter was in line with last year and amounted to SEK 2.3 billion, an increase of 1%. Organically, the growth was minus 1%, and currency contributed positively by 2%. The operating margin was 7.9% in the quarter, which was slightly below last year. However, we should remember that Q1 2019 was a very strong quarter for -- in the group, and we even issued a reverse profit volume during -- after that quarter. Ventilation Systems was the area with the highest profitability, and we reached 10% in the quarter. We continue to make investments at a higher pace than before, according to the program that we have established and the investments reached SEK 133 million during the quarter. Net profit came in at SEK 136 million. We are pleased with that level. It is almost on the same level as last year despite the negative effect at the end of the quarter from the COVID-19. We move to the next slide. We look at the sales per geographic region. In the Nordics, our largest region, we had organic growth of 4%. We had strong development of our Profile Systems and a satisfactory development of Ventilation Systems in the region. We have a limited negative impact of the COVID-19 situation in the Nordic countries. They have been more free to operate the industrial activities and building activities compared to other parts of Europe. Western Europe, we saw a negative organic growth and the main reason behind this is that we were impacted by restrictions and lockdowns during the second half of March, particularly in countries like France and Italy, where the restrictions came in quite a hard way. In the eastern region, we had a minor organic sales decline also due to COVID-19, but the underlying activity and development was good, we can also see that in comparison to Q1 last year, we had last year, quite a significant project in -- within building systems in that eastern region, and that's projected not to reoccur this year. Now we move over to the financial section, and I hand over to you Malin.

Thank you. So we are now on Slide #7, and we look at the group financial highlights. The net sales amounted to SEK 2,332 million, which is an organic growth that decreased by 1%, while we had a positive currency contribution by 3%. EBIT decreased slightly versus a strong third quarter last year as a result of strategic initiatives and somewhat lower organic sales growth. This was partly compensated by strengthening gross margins. Net profit amounted to SEK 136 million compared to SEK 142 million during the same period of previous year, and this translates to an EPS of SEK 1.78 per share versus SEK 1.85 the same period last year. So now we look at the different business areas, and we start with Ventilation Systems at Slide #8. The net sales for Ventilation Systems amounted to SEK 1,510 million, which is in line with the same period previous year. The organic growth amounted to a negative of 3%, while the currency was positive of 2%. We also had a small structure impact of 1% positive. The sales volumes were impacted to some extent by restrictions in post related to COVID-19 during the quarter. In comparison, the same period previous year, had a historically high sales volume for the first quarter, primarily driven by the Nordic and CEE/CIS region. EBIT increased to SEK 151 million versus SEK 149 million first quarter last year. The improvement was mainly related to strengthening gross margin and a stable underlying costs despite the somewhat lower sales volumes. So we continue to look at the Profile Systems on Slide #9. The net sales increased to SEK 587 million. The organic growth was positive and increased by 13%, while the currency was unchanged. Sales increased largely due to deliveries of industrial projects in Sweden compared to last year. In addition, the mild weather conditions was favorable during the quarter, which has a positive impact on the products that are installed outdoor. EBIT increased to SEK 44 million compared to previous year quarter 3 due to significantly higher sales volume. The somewhat lower EBIT margin was a result of a changed product and customer mix. As the proportion of sales and industrial projects was higher during the quarter than the same period last year. And we look now at the Building Systems financial highlights. The net sales amounted to SEK 235 million. Organic growth amounted to a negative of 18%, and the currency contributed positively with 3%. The decreased sales is compared to very strong sales in Q1 '19, with particularly large project deliveries, primarily in Germany but also in Poland. The EBIT amounted to SEK 2 million versus SEK 9 million last year, mainly explained by lower sales volume, which partly is offset by lower operating costs compared to last year. The backlog was lower at the end of Q1 compared to the same period last year, especially for Western Europe and the CEE region, while it was significantly higher in the CIS region. Now we move to Slide #11 and look at the cash flow. The free cash flow before M&A amounted to negative SEK 107 million versus SEK 35 million during the same period last year. The decline in free cash flow in Q1 is due to a much higher investing activity, which is part of the investment program and a negative impact from changes in working capital. The net debt decreased to SEK 2,093 million, which gives a net debt equity ratio of 0.4. So that summarizes the financials, and Ola, now back to you.

Thank you, Malin. On Slide 13, we have a little bit more details on the COVID-19 impact on Lindab group, even though it is still early days and will look here at the impact during Q1. As I mentioned before, we saw a negative impact on sales in Q1, but that's what limited to the countries that took the most severe action against the virus in terms of lockdowns and closing factories and building site. During Q2, we see a most significant negative impact than in Q1. Because we will have the effect coming from March, and they will also expand with more countries affected by the situation in Europe. If we should try to look at some positive light in the tunnel, we start to see that in certain countries right now, and that have been picked the most by these restrictions, we start to see the tendency that they are opening up industry and building sites again. We see this in Italy, we see that coming up soon in France, hopefully followed by U.K., Ireland, Belgium, et cetera. So we believe that the countries that have been under the severe situation that they will start to open up their economies within short. How quickly? That will result in improved demand and the normalized activities, it's very difficult to say. Lindab has 98% or more of its sales within Europe, and we have a high proportion of our sales in the Nordic region. And the Nordic region has not been very much affected yet. We will see how it develops. But so far, the development there for Lindab is good. We are busy in our branches, in our factories, in our distribution centers. And we, of course, have to this will continue. We have a robust supply chain in the Lindab group, and we are proud to say that we have kept the delivery performance up on very, very high levels throughout this crisis. We have stood up for our customers. We have stayed open for them. And we have only closed down activities when we have been forced by government to do so. And we have reopened as quickly as we have been allowed to. We have supplied important projects like hospitals, another key public infrastructure with our products and systems. And we are proud to say that we are keeping our promises to our customers. We have a robust supply chain, I'd say. And what do we mean by that? Well, we have an extensive network of production facilities in Europe. We have stock in warehouses in strategic locations, and we have people, branches, smaller warehouses where we are serving the local customers in the neighborhood. So throughout Europe, we are always close to the customer and can help them in the best possible way. When it comes to further measures taken by the group, we have, of course, taken all the actions to guarantee the safety of our employees and our customers with social distancing and extra routine. And we have also, of course, look through our cost base and initiative cost reduction measures everywhere where it is necessary to compensate for the sales development. We are using short-term work in many countries at the moment. And we try to find the right balance there, so we can keep supplying, but we're also adjusting the cost to the situation. And our employees have been truly supportive and working very hard in these difficult times to adjust, adapt and be there for our customers. And I really want to thank them for their work in this difficult time. Now I move over to Slide 14 and our other focus areas except for COVID-19 in these times because it should not only be about that. Our strategic focus areas remain despite the COVID-19 situation, and we need to also try to have a long-term perspective on our activity. We continue to strive for sustainable profitability in line with our targets. We try to achieve that through decentralization and very clear accountability where each part of Lindab still has the same overall target as before this crisis. However, in the current circumstances, which can, of course, take a bit longer to reach those targets in certain countries. Customer satisfaction is more important than ever. During the corona crisis, Lindab, as I mentioned, stood up with customers. We have kept a remarkably high delivery performance throughout the crisis, and we are continuing to do that during April, including today. We have locked the extra mile to secure deliveries to customers even during severe lockdowns. And as I mentioned, hospitals are one example, but there are many other where we have shown that we are there. While handling short-term challenges, we must plan for the future. We continue to implement key elements of our strategic investment program, especially the projects that will lead to improved cost efficiency and safety for our workers. Some less critical investments are being postponed until we are through the crisis. Now we go to Slide 16, and it's time to summarize and wrap up. So Q1, I would say, we are very satisfied with the results and the sales in Q1, given the circumstances that hit Europe during the second half of March. And we have to remember that we are comparing ourselves to a unusually strong Q1 from previous year. So I think this shows that Lindab has reached a new level of performance under, let's say, normal circumstances. That said, we do expect a greater impact of the COVID-19 during the coming quarter, quarter 2, and I'm sure that we will also see effect in quarter 3. And it is today, very difficult to estimate how severe that will be. But we are in good shape to begin with to handle the situation. So I believe that we will come out of this crisis as a strong company ready to take the next step in Lindab's plan. This concludes the Q1 presentation. We are now opening up for questions.

[Operator Instructions] Now first question comes from the line of Carl Ragnerstam from Nordea.

It's Carl from Nordea. First of all, could you please give an update if you currently have any closed production units in Europe? And also, could you perhaps update us on the utilization rate for the production that you recently reopened?

Thank you, Carl. We have had factories closed in Europe, but we have reopened those. So we -- all our factories are open at the moment, but not to 100%. So we are working with reduced capacity in countries that are still under severe lockdown and where we can only deliver to certain sectors and certain projects that are important for society. For examples of those countries where we still have these restrictions and low capacity utilization is Italy, France, Belgium and Ireland.

And say, if you're running 1 day a week or, is it possible to quantify at this point?

No, not really. We have parts of production open. They are open every day, but not all lines are running. I will not give a percentage of utilization here today. But we -- I believe that in those countries, we see that we have reached a bottom level and started to climb up again. I could say, however, that in most countries and in most factories, we continue to run our factories at close to 100% utilization. For example, in the Nordics, in Central Europe and in Eastern Europe, we are running pretty much as normal at this point. So we see quite a large difference between the countries which have the severest measures, Italy, France, Ireland, Belgium and the West.

Okay, perfect. And just so I got you right. You don't have any supply chain constraints or you have quite solid inventory, I guess?

We have a good situation in our stock and inventory. We have strived for the past 2 years to really get delivery precision up to a very high 90s, 98%, 99%, 99.5%. And that has helped us in this situation. We came into this crisis well prepared with a good inventory. We have kept close to all factories open, and we are not so relying on external suppliers. With Lindab, it's quite vertically integrated, and we have a lot of our own production. So supply is a strength for us at this point in time.

Okay. Perfect. Could you also perhaps shed some light on the demand side, if we talk about the supply side there?

Demand continues to be good in countries that allow building sites to be open and people to travel to work. We have seen a few examples where guest workers have returned home. So some projects have been stopped due to lack of labor. But I would not say that, that has a great impact. The demand, however, in countries that have closed down the building sites and for building people to leave their house. That, of course, is -- it has a very negative impact. And there, we can't do much. We have to wait until the government in a handful of countries decided to restart the economy, if the economy is willing to do so.

Okay, perfect. Could you perhaps also give any indication of the sales development in end of March in Western Europe, for instance, and maybe also in April, if you?

No, we are not guiding like that. So I'm not able to do that.

Okay. Perfect. And final one for me. That's one. This question is regarding capital allocation. I mean, you kept a small dividend and I mean, we saw increased CapEx during the quarter. So how much should we look at you, I mean, postponing CapEx projects for 2020, maybe 2021 as well? Also, could you shed some light on the M&A landscape? Do you have a new team there? Are you still looking for bolt on acquisitions? Or is it put on hold during the turmoil?

Let me see if I remember all those parts of the question. But if we start with acquisitions, M&A. We are continuing to invest as opportunities. But of course, it is a less prioritized area at this very moment when we have to also think about finding the right balance between plans for future and handling the current situation and preserving cash. But we are still actively looking, but I think those types of questions will take a little bit longer during these times. It's also difficult with valuations, et cetera, at the moment. If we look at investments plans, I think I have mentioned before in one of these calls, when you decide on an investment program, this is very important to show endurance, persistence and not suddenly stop in the middle of a program. We have good support from our Board here. And the prioritized parts of the investment program with very important plants and equipment, we are continuing to implement those less critical projects, which will be good to have, but not necessary in the short term perspective. We are investigating if we can postpone or we are actively postponing. We are trying to find the right balance there. But the majority of the investment program is still valid and ongoing. Then you asked about the -- also about the dividend. I think the dividend question is, of course, not my question to answer, it's a question for the Board and the Annual General meeting that we will have later today. But I think in the discussions, the Board is trying to find a balanced between the shareholders' interest and the both short and long-term prospects of the company, and the proposal to the AGM was revised from the previous suggestion of SEK 3.6 to SEK 1.75, and SEK 1.75 is the same level as we paid out last year. So I think the Board has found a balanced rate in that situation and to preserve cash in the company in an unknown situation that every company today is trying to handle.

[Operator Instructions] And the next question comes from the line of Douglas Lindahl from Kepler Cheuvreux.

Douglas here. I noticed that you were not willing to answer the question on volumes in Western Europe. I guess, would you comment on what you're seeing in the Nordics right now in terms of volumes -- demand?

Demand is relatively stable in the Nordics and we see that also in other economic indicators that the building industry is still busy. What will happen later when the next projects should start-up, we don't know. We believe that there is, to some degree, a higher uncertainty around new decisions to start to activate the investments also in the building industry because of the general economic uncertainty. But at the moment, I think macroeconomic indicators will give you good guidance in looking at the impact on different countries or the Nordic countries, but also France and Italy who are shutting badly. And maybe I should add also that due to the fact that our business areas have a different geographic footprint. And most of the impact on Lindab from COVID-19 in Q1, it hit the Ventilation Systems, which is the business area that has more exposure to countries like Italy, France, Belgium, Ireland, U.K. Profile Systems does not have much exposure to those countries.

Yes. And on that note, with regards to Profile Systems, what are your expectations? Can you comment a bit on that on growth rate because Q1 seems to be driven quite a lot about large product deliveries in Sweden? Could you say, if you're looking for positive or negative organic growth in the next quarter?

In the Nordics, I'm quite optimistic about the growth prospects for Profile Systems, we're right in the report that, yes, it was favorable weather conditions, and we had large projects. But the normal bread and butter business for Profile Systems was also running in quite a good way. So we have, I would say, good traction in the sales and we see continued high activity levels in the Nordics for Profile Systems. So there, I'm rather optimistic. Then we have some exposure also to Eastern Europe within Profile Systems. And I would say that currently, there is a little bit more political uncertainty about those countries and the actions that might be taken by government in countries like Hungary or Romania, where the COVID-19 is, of course, also present.

And going back to countries, maybe a difficult question to answer. But is it possible to sort of generalize on a normalized basis, what sort of margin levels you see in different geographies? One of your competitors have historically said that margins are more beneficial in the Nordics and sort of decreased the more south you go in Europe, is that something you agree with?

No. We don't -- I would not say that we have such big margin differences between the different regions. So I would not draw the same conclusion about Lindab.

Okay. Got you. Yes, and I was just wondering also on the mix that you saw in ventilation in Q1. You mentioned that COVID-19 was negative. So very strong margin in that context. But did mix have any impact on profitability in the first quarter? And also, do you see a change in mix going forward potentially for ventilation?

Well, we have -- let me see if I understand how you're asking the question. We have a couple of different mix effects. We have, of course, between the -- we have between countries. We have between the different product ranges or business areas. And then we have also a seasonality between the different...

I was talking about those products.

So normally, Ventilation Systems has a lot of weight in our sales during Q1, for example, when normally Profile Systems and Building Systems are a little bit -- they have a weaker period. And then during Q2 and Q3, normally in Building Systems and properties, and they are at a stronger weight. So that can have an impact. We had -- what we have in Q1, we saw a lower share of invoicing out of the group total from Building Systems where you saw a larger decline.

Sorry, maybe I was unspecific. I was talking about Ventilation Systems specifically?

Within ventilation?

Yes, exactly, within Ventilation Systems.

You are wondering if there are different products within Ventilation Systems with different profitability were...

Yes.

So the mix effect and -- No, we have not seen any particular effect like that.

Okay. And final question, I guess, you sort of hinted on that, but the CapEx levels, you remain firm that they should stay above 100% of [ DNA ], I guess?

Yes. It became very silent now, so we are wondering if people are still awake or if there are no more questions.

[Operator Instructions] And we've seen just one more question, but just one moment once we capture the details for the question. And our next question comes from Carnegie.

Yes. So I was a little bit curious. We talked a lot about now the current situation and outlook for Q2 and so on. But when we look into the end of this year and maybe into next year, do you see that demand would really bounce back as strongly as it has sort of closed down? The way I'm thinking about it is that maybe some construction companies and real estate owners get badly hit from these lockdowns and may not have the financial power or so on to restart projects. So maybe we have a sort of a slower recovery? So yes, another way to frame the question might be that when do you think that demand level could be back to the level it was in Q1? Do you think we can reach...

That's a million dollar question that we all want to answer and there are so many aspects here. I mean, some countries with a tough lockdown policy. And they seem to hope that they can suddenly one day just decide to open up again and everything will be as it was. Some countries, they have a very good system for short-term work and social system that takes care of people and companies during the time of loan and some other countries, they don't even have that. Sweden has chosen its own way. We are very grateful for the way that Sweden is handling the situation. We might not have very clear or very generous short-term work conditions. In fact, I think they are pretty difficult to understand. But we are not closing down the economy. And for that, we are eternally grateful. So then, I guess, the question is what will happen to the risk appetite from investors who are -- who want to build new? And what will happen to the upgrading and repair and renovation market? And what will happen to the public investment market investing in badly needed hospitals, upgrading school indoor environment, taking -- making sure to have a good indoor air quality everywhere where people meeting in large groups to prevent future viruses from spreading et cetera, et cetera? It's extremely difficult to know how will this play out, and in what quarter will we see what kind of growth. So I would really like to be able to answer the question. But I simply can't. We -- the way we try to handle it is we have outlined different kinds of scenarios. We don't have a scenario that's a 25% growth next year. They are more humbled, the scenarios. But we have different kinds of scenarios for different development, and we try to have very good action programs to activate depending on which of these tend to be likely at the current planning horizon. And that's the best we can do. There are so many unknowns today that we cannot and should not go out and promising. What we will promise is that Lindab will be in the very best shape, and we will be among the leaders when we start to see growth. And we will be one of the companies that will take opportunities and take advantage of this situation when we emerge as a strong company. We have supplied our customers throughout the crisis at 99-point-something percent delivery performance and never close down unless we were force to. So that is how we want to show our strength, and we want to be well invested and extremely efficient coming out of this crisis.

Also one question. In Sweden, there have been the debate that it's hard to use the government support system for employees working part-time if you pay a dividend. So many companies have sort of excluded or canceled the dividend for this year. Do you see that discussion in other countries as well? Or is it -- are you just affected by that in Sweden?

It is mainly Swedish politicians who trade that game, but typically, you would also see it in France. Sweden and France they have the highest tax rate in the world. So normally, you see those types of arguments from those 2 governments. The Swedish system for short-term work is very difficult and very uncertain. So I think most companies choose not to utilize it because we don't really believe it. We are using this short-term work system in most other European countries, where it is much clearer and much quicker, and they were -- they already had these systems while in Sweden we're still trying to find a treat. So in Sweden, we have still stable sales, we have decided to save cost in other ways.

And if sales is more affected in Sweden and so on, maybe you can use -- well, I agree with the unions to have more flexible workforce and move some hours back and forth maybe?

We have very good relations with the unions in Sweden, and we have already implemented voluntary schemes for the personnel to reduce time banks and holidays and utilizing those kind of voluntary tools in good cooperation with the representatives from the union. So we have found another model here. And that is such that we don't need to take more action. Let's hope that Sweden can stay open for business also for the coming months.

Yes, that's my hope as well.

And we seem to have no more questions registered, so I hand back to our speakers for any closing comments.

We thank you for calling in. We -- my final remark is maybe that I want to thank all Lindab colleagues for a very strong quarter 1. It feels good to have that strength now when we are entering into more difficult times, but I believe we will come out as a strong company on the other side. So thank you for that.

Thank you.

Thank you for calling in.

This now conclude the conference.